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Sub-Prime Crisis: An Economic Perspective

2.
<ul><li>The days of high levels of employment and high disposable income in the hands of individuals saw </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>High demand for commodities and goods </li></ul>Source: www.bloomberg.com PaisaMatters.com

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1995 – 2006: The Bright and Sunny Days… <ul><li>Increasing demand led to increased production levels </li></ul><ul><li>Jobs creation and an all around industrial and economic growth </li></ul>PaisaMatters.com

7.
<ul><li>High income levels and desire to own a dream home had already created a good mortgage loan portfolio </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>Low interest rates made the housing more affordable and allowed to borrow more </li></ul><ul><li>The prime mortgage loan market was falling short of propelling the desired exponential credit growth </li></ul><ul><li>There was a huge population with ‘ less than perfect credit ’ to be tapped </li></ul>PaisaMatters.com

8.
<ul><li>Borrowers with less than perfect credit - the Subprime borrowers, presented a mouthwatering opportunity for bankers in the mortgages market </li></ul>1995 – 2006: The Bright and Sunny Days… <ul><li>Banks started chasing the subprime borrowers with easy loans </li></ul><ul><li>People who otherwise could not have afforded a home, bought homes with the high interest rate loans </li></ul>PaisaMatters.com

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1995 – 2006: The Bright and Sunny Days… Welcome to the world of Sub-Prime Mortgages PaisaMatters.com

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1995 – 2006: The Bright and Sunny Days… <ul><li>Subprime loans are mortgages given to borrowers with ‘ less than perfect ’ credit or poor credit history </li></ul><ul><li>Most subprime borrowers are ones with low and inconsistent income </li></ul><ul><li>Because subprime loans are riskier, they carry a higher rate of interest </li></ul><ul><li>Not all subprime mortgage loans were used for buying houses but to refinance other obligations like credit card debts, making them even more risky </li></ul>PaisaMatters.com

11.
1995 – 2006: The Bright and Sunny Days… <ul><li>Borrowers were happy to get loans without worrying about credit worthiness </li></ul><ul><li>Mortgage brokers were happy as they were paid to underwrite these easy selling subprime loans without a responsibility to recover </li></ul><ul><li>Bankers were happy with the credit growth and higher returns from subprime loans </li></ul><ul><li>A Win-Win for all, but not for long. </li></ul>PaisaMatters.com

13.
1995 – 2006: The Bright and Sunny Days… <ul><li>The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets </li></ul><ul><li>This allowed banks to pass on the risk of default to investors of MBS </li></ul><ul><li>This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans </li></ul><ul><li>The buyers of these subprime MBS thought they were taking a calculated risk of default in lieu of higher returns </li></ul>PaisaMatters.com

20.
Q3 2007 Onwards: The Scary Nights… <ul><li>The subprime borrowers with inconsistent and low incomes could not pay the increased loan installments </li></ul><ul><li>Banks started to tighten the credit norms preventing subprime borrowers to refinance existing debts to lower payments </li></ul><ul><li>Borrowers could not sell the property to repay debts as the house was worth less that what they bought for </li></ul><ul><li>This left borrowers with an option to bring in more money or miss the loan payments </li></ul>PaisaMatters.com

21.
Q3 2007 Onwards: The Scary Nights… <ul><li>Improving cash flows was a distant possibility for sub-prime borrowers, missing payments was obvious </li></ul><ul><li>The sub-prime loan defaults started mounting </li></ul><ul><li>With a further continuous increase in interest rates, it became almost impossible for borrowers to repay the increased mortgage bills </li></ul><ul><li>Loan foreclosures started increasing </li></ul>PaisaMatters.com

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Q3 2007 Onwards: The Scary Nights… <ul><li>Because there were not many buyers for foreclosed properties, banks could not recover their outstanding loans by selling the foreclosed properties </li></ul><ul><li>With tightened credit norms, fewer borrowers qualified for new loans leading to more homes to sell to fewer buyers </li></ul><ul><li>Banks left with no other option but to write off the outstanding defaulted loans </li></ul><ul><li>Once considered cash cows, the high return fetching mortgage backed securities (MBS) became worthless </li></ul>PaisaMatters.com

27.
Q3 2007 Onwards: The Scary Nights… <ul><li>The panic started to spread </li></ul><ul><li>Stock markets crashed </li></ul><ul><li>Lost confidence in financial system </li></ul><ul><li>Wall street pillars started crumbling </li></ul><ul><li>USA is witnessing one of the largest systemic collapse in its history </li></ul>Source: newsimg.bbc.co.uk PaisaMatters.com

29.
?: The Dawn Ahead… Costly though, surely, a lesson for the economy Is the worst over yet? … Probably not ! How long before the economy starts looking-up again? … Nobody knows! Hopefully Sooner, is the Dawn Ahead… PaisaMatters.com